1) Use the formula for perpetuity to compute the value of a preferred equity that pays 2% on a PAR value of $100 when the opportunity cost of investing in a similar instrument is 7%. How will the valuation change if interest rates or the discount rate used rises or falls?
2) Use the formula for the present value of a bond to compute the bond price and value per $1,000 PAR amount for a bond with a 5% coupon and 10 years until maturity if the opportunity cost of investing in a similar bond is 3% or 7%. How would the valuation change if the yield curve steepened or if credit spreads widened?
3) 1-Risk is a major concern of almost all investors. When shareholders invest their money in a firm, they expect managers to take risks with those funds. What do you think are the ethical limits that managers should observce when taking risks with other people's money?
4) Why managers should always have a fiduciary relationship with the investor.